Operations

Trends in Vehicle Capital Costs

June 25, 2018
• by Ken Robinson

Over the past 12 months, depreciation accounted for 36.8% of the total cost to own and operate a vehicle.

Photo courtesy of Getty Images.

Try as they might, businesses can’t control everything that affects them. Stock markets, government regulations, labor laws, and myriad other outside forces — powerful, invisible entities that pull the strings like Zeus up on Mount Olympus — dictate the way a company runs and how it evolves.

Costs and spending trends are no different. A multitude of economic factors go into how people spend their money, which in turn influences how businesses behave.

For businesses that have mobile workforces and vehicle programs — whether a fleet, company car or reimbursement program — as part of their operations, this means that every fluctuation of fuel costs, driving trends and vehicular habits ultimately impacts them.

A number of rising trends will influence businesses with mobile workforces in the coming year, including increasing depreciation, rising new vehicle prices, and declining residual values.

Depreciation will Increase

Over the past 12 months, depreciation accounted for 36.8% of the total cost to own and operate a vehicle. This is a slight year-over-year increase, but is higher than two years ago, when depreciation accounted for 35% of total costs.

Rising vehicle prices will partially offset the impact of this trend. Depreciation is expected to increase 1% to 1.5% as a result, starting slowly (less than half a percent over the next few months) and increasing as the year continues.

As depreciation increases, resale value will fall, meaning businesses with fleets and company cars will get less return on their investment when it comes time to resell.

Residual Values will Drop

Residual values will decrease over the next 12 months by 2% to 3.5% as inventory in the used vehicle market steadily increases.

In 2017, the average sale price for a used vehicle dipped below levels not seen since 2011. This continues a trend of declining residual values over the past three years. When the Great Recession, which began in December 2007 and was at its height in 2009, disrupted new vehicle sales, residual values increased because people started keeping their vehicles longer.

This created pent-up demand for new vehicles that helped drive record sales volumes once people felt the economy had straightened out and their finances were back to normal. The surge in new vehicles purchased post-Great Recession now are aging out, and are being sold as used vehicles. Due to the law of supply and demand, there is now a glut of used cars on the market, which will drive the price of that commodity down.

Several factors affect residual value:

A record number of new cars were leased in the retail market and not purchased in recent years. In 2017, new-vehicle leases accounted for 31.1% of new-vehicle sales; in 2016, it was 31.9%. In fact, there has been year-over-year incremental growth in this sector since 2009.

As those cars reach the end of their three- or five-year leases, they will return to the market as used cars, creating an overage that will almost certainly outpace buyers in the market.

The car-rental industry is also expected to contribute a larger number of vehicles to the used-vehicle market in the short term. Both business and leisure travelers have shifted away from renting cars and toward ridehailing services like Lyft and Uber, leaving car-rental companies generating less revenue per vehicle.

As a result, car-rental companies are beginning to trim their fleet size to improve their profitability, adding their unwanted vehicles to the market as used vehicles and contributing to the used-vehicle surplus. This will place additional downward pressure on vehicle residual values.

A mitigating factor that will temper the decline in residual values is the growing preference for SUVs and trucks versus cars. SUVs hold their value longer than mid-size cars, reaching the 50% marker of how much they’re currently worth versus MSRP later in their lifespan than midsize cars. Mid-size SUVs are viewed as having more life left in them, and enjoy more consumer demand than midsize cars at every point along the mileage and aging process, which slows SUVs’ depreciation rate.

In business vehicle programs, residual value is a major contributor to capital costs, working as a handshake with the upfront costs. A decrease in residual values means business won’t get as much resale value for vehicles they bought new if they sell them in the next few years, which is an important budgetary planning consideration.

New-Vehicle Prices are on the Rise

The overall average price of a new vehicle will increase moderately over the next 12 months by 1% to 2%. While production costs for new fuel efficiency and safety features continue to rise, new-vehicle sales are expected to decline. Automakers will limit price increases in order to sustain demand.

New-vehicle prices in the U.S. have risen steadily since 2012, with the 2017 average transaction price equal to $34,903.

Automakers incur increased production costs for improvements like more fuel-efficient engines and transmissions and lightweight body materials. Tightening federal fuel efficiency standards require automakers to invest in these new features, and they pass the costs on to consumers. Advanced driver assistance systems like adaptive cruise control, tire pressure monitoring and automatic braking help automakers obtain top safety ratings, but also drive prices up.

New-vehicle prices have increased minimally for cars and trucks, and more rapidly for SUVs due to growing demand for the latter vehicle style. In recent years, light-truck and SUV sales have increased from 45% of new-vehicle sales in 2009 to more than 60% of new-vehicle sales in 2016.

Analysts expect overall sales to soften in the coming years. To maintain sales in the future, automakers will only pass on some of their higher production costs to new-vehicle buyers.

As the price of new vehicles goes up and resale value goes down, it costs buyers more money in the long run – over the total life of the car — when they resell a vehicle. This means mobile workforce businesses will pay more over the long term to replace their fleet or company vehicles.

Staying Current with Trends

Keeping tabs on these trends is critical for companies with business vehicle programs, as it helps them understand the true cost of owning and operating a vehicle, and how outside market factors affect total cost of ownership.

However, these trends are not easy to predict unless a company has time to do its own outside research, which means that sometimes a business can be behind the game. Additionally, structuring a business vehicle program that can accurately measure and account for these types of trends can be difficult, because there are so many factors to take into account.

By partnering with a reputable third-party in the business vehicle industry, companies that require a mobile workforce can better understand the TCO of their company car or fleet programs, and how to better structure their fleet or reimbursement programs. A business vehicle solution provider can develop a custom program that meets their requirements and strategic objectives. These programs are designed to meet different business needs, and the best solution is dependent on what works best for an individual business and their mobile employees.

Most businesses don’t want to be in the vehicle business, and would prefer to focus on what they do best: their own business. Outsourcing the vehicle program to an expert that can use key industry trends and research, along with knowledge of the business itself, to create a custom program will help companies understand the true total cost of vehicle ownership, save money, and reduce monetary risk.

About the Author: Ken Robinson is a market research analyst at Motus, a cloud-based vehicle management and reimbursement platform. With extensive product management and market research experience, he has a vital role in market research, data studies and distilling research into market landscape and trend reports.

Bobit Business Media has been acquired by Gemspring Capital, a middle-market private equity firm. Bobit, which bought HDT in 2012, was founded by Ed Bobit in 1961 with Automotive Fleet and today is a successful business-to-business media company in the fleet, transportation, beauty, and law enforcement industries.

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